Are you an IRA procrastinator?
Waiting until the last minute to contribute to an Individual Retirement Account could cause you to leave serious money on the table.
Before we explain how procrastination can hurt your retirement account, let’s review the rules regarding IRA contributions.
The first day that a motivated investor can sink money into an IRA is January 1 for the new tax calendar year. For the current 2014 tax year, as an example, the first day that investors could have made a 2014 IRA contribution would have been January 1. Investors who aren’t in a hurry will be able to contribute to a 2014 IRA as late as April 15, 2015. Americans get a 15 ½ month window to fund their IRAs every year.
According to a Vanguard Group analysis, retirement savers contribute 41% of their IRA dollars in the last 3 ½ months of the cycle.
What’s wrong with that? Plenty, say experts.
If you dawdle, you can miss out on the long-term benefits of compounding gains. Let’s take a look at an example that illustrates this reality from The Wall Street Journal. An investor contributes $5,500 to each year’s IRA in January rather than 15 ½ months later and he repeats this for 31 years. If the account generated an annualized return of 7%, the investor’s IRA account balance would be roughly $55,000 greater than if he had waited until the last minute to invest each year.
Here’s another reason not to dawdle. Once you sink money into an IRA, it is sheltered from taxes as long as it remains in the account. If the money is invested in a taxable account for extra months, it could trigger unnecessary taxes on capital gains and interest income.